Should I pay LMI or keep saving for a 20% deposit? David Koch weighs in

Compare the Market’s Economic Director David Koch said paying extra for Lenders Mortgage Insurance (LMI) may be the only option to overcome the hurdle for buyers without access to the ‘bank of mum and dad’. 

“Some lenders will allow you to apply for a home loan with a deposit as low as 5% but usually you will have to cough up more for Lenders Mortgage Insurance – a fee that accounts for additional risk,” Mr Koch said. 

“Depending on your loan size and deposit, that could add tens of thousands of dollars to your loan, so it’s not a commitment that should be taken lightly. 

“But is LMI still a dirty word? If owning a home is part of your long-term plan, and you are confident you can meet the repayments, you could still reap the rewards in equity if the value of the property increases enough before you decide to sell it.”

How much will you need to save to get a 20% deposit?

Mr Koch said many young buyers were finding themselves priced out of the market due to rapid price growth.

“With property prices climbing tens of thousands of dollars in some parts of the country, a lot of buyers feel that they are falling behind while trying to save that 20% deposit,” Mr Koch said. “Those people might weigh up the extra cost of LMI and find it might be worth it.

“Just remember that when LMI is added to your mortgage, you’ll also pay more in interest too and that can add thousands on to your repayments over the life of your loan.

“The median house and unit value in Australia increased 72% in the decade to 2022, helping to put hundreds of thousands of property owners on the path to financial freedom.

“Ask those borrowers if they regret taking out LMI and they’d probably say it was worth it.” 

LMI pros

·   Get into the market sooner

·   Beat possible property price hikes

·  Benefit earlier from any increases in property values

LMI cons

·   Usually accompanied by a higher interest rate

·   You will have a larger loan

·   Loan repayments may be higher

LMI can cost several thousand to north of $20,000, depending on the size of your deposit and how much you’re borrowing.

Some lenders may offer to waive LMI for customers in high-earning professions, such as doctors and lawyers because they are considered to be less risky. 

There are also LMI offers available to select borrowers; some lenders may offer LMI for $1 for eligible homebuyers.

NAB is one bank that offers a discounted LMI loan for energy efficient homes on a base variable rate.

If you don’t have help from the bank of mum and dad, then incurring LMI might be your helping hand onto the property ladder.

Kochie’s tips for getting into the market:

Calculate the costs

Your saved deposit will need to cover the various upfront costs associated with buying a house, including stamp duty and conveyancing fees. Compare the Market has a property buying cost calculator that can make it easier to budget for your property.

Get a suburb report

Get a free suburb report and get to know what houses are selling for in your desired area. If the median is high, check and see if you’re able to get better value for your money a suburb or two out. 

Secure the lowest interest rate

Compare the Market can help you choose a competitive home loan rate, which can make a big difference when it comes to mortgage affordability. Some experts are forecasting that the RBA will increase interest rates again this year, meaning you’ll want to be on the best possible deal.